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Can Michael Kors Keep Up the Pace?

This morning, Michael Kors (NYSE: KORS) beat analysts' forecasts and turned in a solid fiscal 2014 fourth-quarter profit of $0.78 per share, a 56% increase from the fourth quarter in fiscal 2013. Investors were less impressed with pressure on the company's margins. Gross margin increased year over year, but declined from the third quarter's margin. The mixed results have kept shares basically flat at midday.

Even considering the gross margin fluctuation, Kors had an excellent quarter that showed much of the sales strength that the high-end apparel retailer has displayed historically.

Kors sales on the riseComparable-store sales in North America increased 20.6% year over year. Compared to the rest of the luxury market, that's a success. Comps at Coach (NYSE: COH) dropped 21% in North America in its most recent quarter, while high-flying Kate Spade (NYSE: KATE) increased comparable-store sales by 22%.

Michael Kors has continued pushing sales up by keeping its brand in the public eye. Recently, Angelina Jolie, Miranda Kerr, and Kate Middleton have been spotted wearing Kors. As a result, when the affluent and the aspiring affluent go shopping, they're pulled right into the shining Kors store.

In North America, it seems that only Kate Spade has kept pace, with its apparel also showing up on plenty of celebrities. Both companies seem to be reaching across the table and stealing from Coach's lunchbox. Coach has been adrift in North America for a year, leading one analyst to say, "Coach customers are becoming Kors customers."

Is Michael Kors worth it?With rising sales and profit, Kors is trading for 32 times trailing earnings. That's well above the retail average, representing the possibility -- that's a key word here -- that Kors has to keep rising. Kate Spade is trading at an even higher multiple, while Coach is deep down in discount range.

I have very little doubt that Kors, as a brand, is going to suffer as there hasn't been any sign that it's losing any of its cache. The worry is that Kors is saturating its strongest market, North America, which might mean that it may eventually resort to discounting in order to bring in new customers.

Based on the current trend, Michael Kors looks like it could be headed for a gross margin decline. If it can institute some additional operational efficiencies it may be able to keep those declines at the gross level without damaging earnings per share. Investors interested in Kors should keep a close eye on the company's promotional activity and how that trickles down to the bottom line. For the price, it seems overly risky right now.

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